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Stocks With Huge Potential

Invest to make money. It's as simple as that.

My Motley Fool colleagues and I recently sat down with Dr. Jeremy Siegel, noted professor of finance at the University of Pennsylvania's Wharton School, to talk investing. Professor Siegel said in that meeting that he believed investment advisors who keep the international component of their clients' portfolios in the typical 5% to 15% range are doing them a disservice. Instead, he felt that international stocks should comprise some 40% of the average investor's portfolio.

Now, as a value guy, I'm not a huge fan of portfolio allocation. As I've said before, I want my money invested 100% in companies that don't suck, and 0% in companies that do.

But I think Siegel has a good point: Too many investors view "international" as a sector, akin to "technology," "consumer staples," or "decorative paper products." But that would be some kind of sector: International stocks have a collective market capitalization on par with that of all American stocks -- and offer incredible diversity.

An imperfect classificationIf international stocks are to be viewed as a sector, perhaps someone can tell me the commonality between, say, Spain's Telefonica (NYSE:TEF) and Japan's Nomura Holdings (NYSE:NMR). They aren't in the same country, business, continent, or industry. They don't use the same currency, and they aren't dependent on the same supplies, commodities, or labor pools. They're only in the same "sector" in three ways: They're located on the planet Earth, they both seek to make some kind of money, and they're not based in the United States.

Those two companies are in the same sector in the same way that Kenneth Branagh and Carrot Top are in the same business, which is to say: They aren't.

Great global opportunitiesI started investing in international companies many years ago because I wanted to. While I liked the thought of owning America's great businesses, I loved the idea of owning the world's great businesses. Moreover, because there are many reasons why you wouldn't want to invest in foreign securities (from risk to unfamiliarity to lower standards of governance and regulatory protection), I believe that many of the market's great bargains exist overseas.

Even better, if you open yourself up to global investing, you have the ability to find opportunities in countries that are at the same point in their growth trajectory that America was 20, 40, even 60 years ago. That is to say, the growth and industrialization train is just pulling out of the station. Fueled by the torrid performance of companies such as Companhia Paranaense de Energia (NYSE:ELP), Brazil's stock market has grown at nearly 60% per year since 2002.

Classic investment techniques applyFor me, international investing is not so much a matter of diversification -- though I fully accept that this plays an important role in investors' desire to look overseas for investments -- but a matter of making money. After all, if I found that all my best ideas were located in the United States, I'd invest all of my money there.

But they aren't. Never have been. Foreign markets simply have huge growth potential, even as many investors still shy away from them. And I suspect that this condition will remain true. You'll have opportunities to buy foreign companies very cheaply for many years to come -- if you know where to look.

Successful international investing doesn't mean simply saying, "Well, China's big -- I'll buy China." No, it means applying fundamental stock analysis to other countries and picking the best opportunities. In other words, it means buying Dr. Reddy's Laboratories (NYSE:RDY) this past year, when the Indian stock indexes suddenly shed some 30% of their values.

So as we chase fortunes abroad, we also need to remember to play good defense.

The Foolish bottom lineSome of the great brands in the world are now overseas, including those held by Diageo (NYSE:DEO) and Sony (NYSE:SNE). In fact, in Sony's case, no American brand can claim to be its proxy. Apple (NASDAQ:AAPL) perhaps comes closest, with its impressive portfolio of consumer electronic devices. Yet, perhaps even more important for investors today, many -- if not most -- of tomorrow's great brands are being built overseas right now.

That's why The Motley Fool launched a new investing service, Global Gains, with yours truly at the helm. The challenges facing the international investor, from lower levels of information to regulatory deficits, are why we structured this service to help you wend your way through the maze of stock exchanges around the world. Fortunately, if anything, the globe has gotten smaller, so we've designed the service to focus on international companies that have shares available for purchase in the United States.

It's easier today than ever before to buy foreign shares. It's also easier than ever, thanks to the miracle that is the Internet, to get information on companies around the globe. But it's less easy to figure out which countries' information and accounting are trustworthy, and which are not. That's why we're here.

This article was originally published on Nov. 10, 2006. It has been updated.

Bill Mann is the advisor of the Motley Fool Global Gains international investing service. You can try Global Gains free for 30 days by clicking here. Diageo is an Income Investor recommendation. At the time of publication, Bill owned none of the companies mentioned in this article. The Fool is investors writing for investors.